u.s. customs trade compliance what japanese exporters need to know
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U.S. Customs Trade Compliance: U.S. Customs Trade Compliance: What Japanese Exporters Need to KnowWhat Japanese Exporters Need to Know
Tokyo, Japan February 26, 2007
Robert J. PisaniPisani & Roll1717 K St. NW Suite 600Washington, DC 20036Tel 202.466.0960Fax 877.674.5789rpisani@worldtradelawyers.comwww.worldtradelawyers.com
Michael E. RollPisani & Roll1875 Century Park East Suite 600Los Angeles, CA 90067Tel. 310.826.4410Fax [email protected]
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Seminar Agenda
1. Overview of Requirements for U.S. Importers and Impact on Exporters to the USA
2. U.S. Tariff Classification for Japanese Exporters
3. U.S. Customs Valuation for Japanese Exporters
4. Special Duty Program Requirements & Country of Origin Marking
5. Basics on Customs Enforcement Actions (e.g., Detentions, Seizures & Penalties) – What Exporters Need to Know
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Part 1 - Overview of Requirements for U.S. Importers and Impact on Exporters to the USA
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Some Trade Facts: Japan/USA
• Japan is the 3rd largest trading partner of the USA (for both imports and exports – source: US Census Bureau)
• Japanese exports to the USA in 2005 exceeded 135 billion USD in value (Source – US Census Bureau)
• 68% of the annual 5.7 million sea containers arriving in the USA come from 20 Megaports*
• Tokyo, Kobe, Nagoya & Yokohama represent 4 of the 20 megaports*
• Nearly 8% of all sea containers arriving in the USA come from these ports*
*Source: U.S. Customs Website
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U.S. Bureau of Customs and Border Protection (CBP)
• Formerly known as the “U.S. Customs Service,” CBP is part of the new Department of Homeland Security (DHS).
• As the primary border agency, CBP enforces its own requirements and those of many other U.S. government agencies with interest in cross-border trade, including, among others:
– Food and Drug Administration– Department of Agriculture– Consumer Product and Safety Commission– Department of Transportation– Federal Communications Commission– Environmental Protection Agency– Federal Trade Commission– Drug Enforcement Administration – Census Bureau
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U.S. Customs (CBP) has Changedits “Mission” or Priorities:
1. Border Control and Trade Facilitation
- Programs to combat international terrorism
- Improve flow of trade without impairing homeland security
2. Investigations & interdiction
3. Commercial Compliance
- Rapidly modernizing CBP information systems
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Benefits of Customs Compliance
• Efficient, predictable supply chain.• Shorter cycle time.• Lower cost.
– Less overpayment of duties.– More opportunities to reduce duties.– Fewer fines, penalties.
• Better vendor/customer relationships.• More control over business operations.
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Risks of Non-compliance (What can happen if U.S. Customs discovers non-compliant importations)
• Additional duty; loss of duty preference• Fines or penalties Delays at the border• Seizures• Damage to reputation• Damage to vendor/customer relationships• Criminal liability• Increased government scrutiny• Aggravating factor for future violations
NOTE: These risks also apply to non-revenue violations, including violations involving unconditionally duty-free goods.
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Customs Compliance Concepts — Customs Modernization Act (enacted December 8, 1993)
• Shared Responsibility: U.S. Importers and Customs have a mutual responsibility to ensure compliance
• Informed Compliance: Customs' responsibility is to clearly and completely inform importers of their legal obligations with regard to importing
• Reasonable Care: Requires U.S. importers to use reasonable care when they provide Customs with entry information, including the tariff classification, value, and rate of duty applicable to their merchandise
• Enforced Compliance: Customs will transition from informed compliance to enforcement measures
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“Reasonable Care”
• Section 484 of the Tariff Act, as amended, requires a U.S. importer of record,
“using reasonable care” to make entry by filing such information as is necessary to enable the Customs Service to determine whether the merchandise may be released from customs custody,” and using reasonable care - - “complete the entry by filing with the Customs Service the declared value, classification and rate of duty” and “such other documentation...or information as is necessary to enable the Customs Service to….properly assess duties…collect accurate statistics…determine whether any other applicable requirement of law…is met.”
• The facts and circumstances surrounding every import transaction differ from the experience of the importer to the nature of the imported articles.
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Key Compliance Areas Requiring Reasonable Care
• Tariff Classification - - “What is it?”• Valuation - - “How much is it worth?”• Country of Origin - - “Where was it made?”• Special Requirements - - “Are unique reporting or documentary
requirements applicable?”• Preferential Trade Programs - - “Does the imported product
qualify for duty-free or reduced duty benefits?”• Unfavorable Trade Issues - - “Is the imported product subject to
punitive duties or action?”• Recordkeeping - - “Does the importer retain required
documentation to substantiate claims made at the time of entry?”
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Entry Process
• Pre-shipment negotiations between U.S. importer and overseas supplier initiate shipment (e.g., purchase order, terms of sale, payment terms)
• Seller/exporter prepares commercial invoice• Goods arrive in the United States• U.S. Importer or authorized agent (Customs Broker)
prepares and files entry documents (i.e., CF-3461, invoice, and packing list)
• Customs decides whether to examine / release goods (Customs may ask questions!)
• Broker files entry summary (CF-7501) and submits duty payment
• Customs reviews entry summary transaction• Entry summary is liquidated (finalized), usually 314 days
after date of entry
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Commercial Invoice
Usually, the exporter prepares thecommercial invoice (must be in English)
KEY COMPONENTS OF THE INVOICE:
• It is IMPERATIVE that the exporter provide an accurate description of the article
• Buyer/Seller Information & Date• Quantity• Value • Country of Origin• HTSUS
– Japanese exporter should coordinate with US subsidiary/importer
(See 19 CFR141.86 through 141.89 for complete requirements)
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Invoice Description – What’s required by US Customs
19 USC §1481(a)(3) provides the legal requirement concerning how the merchandise must be describedon the commercial invoice:
(3) A detailed description of the merchandise, including the commercial name by which each item is known, the grade or quality, and the marks, numbers, or symbols under which sold by the seller or manufacturer in the country of exportation, together with the marks and numbers of the packages in which the merchandise is packed…
• One of the most common forms of U.S. Customs non-compliance that may subject the importer to fines and penalties involve incomplete, insufficient or inaccurate invoice descriptions
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Examples of Invoice Descriptions
• Bad Descriptions
– “ … Part 123456”– “ … Parts and accessories”– “ … Replacement parts”– “ …O-ring”– “ … Power supply”
• Good Descriptions
– “… Replacement parts for car radio consisting of knob, tuner, and face plate…”
– “… Polyethylene o-ring”
– “… Power supply for laptop computer”
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Elements of Entry / Entry Summary
• U.S. Importer / Consignee Identification• Description / Classification of Goods• Declared Value – Including Non-dutiable
charges and additions to Value• Country of Origin / Export• Manufacturer / Seller• Related Party• Other Information Required to Administer U.S.
Laws• Surety Coverage
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U.S. Customs Options at Time of Entry
• Release Cargo Immediately• Perform Document Review
– Decide to Release– Decide to Examine
• Perform Intensive Examination or Inspection– Release if Compliant– Delay, Detain, or Seize if Non-Compliant
• Review for “Other Government Agency” (OGA) Requirements
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Communications from Customs
• Request for Information (CF*-28)• Notice of Action (CF-29)• Notice to Mark and/or Redeliver (CF-
4647)• Notice of Liquidation (CF-4333A)• Detention and/or Seizure Notices• Notice of Liquidated Damages (CF-
5955A)
*CF = Customs Form
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Binding Rulings and Internal Advice
• Binding Rulings – For prospective transactions, a written request for a binding ruling can be submitted to U.S. Customs and a written decision is issued to the U.S. importer by Customs
• A ruling must be followed and identified to Customs when the subject merchandise is imported
• Internal Advice – For current transactions, a U.S. importer may request an internal advice decision from Customs
• A published ruling is binding on Customs and the U.S. importer until it is revoked
• Proposed revocations must be published in the Customs Bulletin with notice and comment provided in accordance with the Customs Modification Act and 19 U.S.C. § 1625(c)
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Part 2 – Tariff Classification
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Tariff Classification
• US importer is required to use “reasonable care” in identifying the correct tariff classification– Burden is on importer, not U.S. Customs, to properly
classify merchandise
• Like Japan, United States uses Harmonized System– Similarities in nomenclature for first 6 digits– Differences in interpretation– Differences beyond 8 digits
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Tariff Classification
• Impacts many aspects of the importation– Duty rate
• Note that in the United States (unlike, for example, Mexico) antidumping duties are not determined by HTS
– HTS may be a “trigger” for other government agency requirements
– Country of origin determinations
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Tariff Classification
• Japanese exporter should:– Coordinate HTSUS determination with U.S. importer
• Do NOT assume Japanese HTS also applies in United States
– Develop common “dictionary” or “database” of the tariff classification of all parts shipped to United States
– Print HTSUS (at least to 6 digit level) on Japanese export invoices
– Avoid overuse of “basket” or “parts and accessories” tariff provisions
• Excessive use of these provisions considered a “risk area” by U.S. Customs
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Tariff Classification
• Japanese exporter should (continued):– Try to implement “NO HTS = NO SHIPMENT” or “NO
HTS = PART NUMBER NOT CREATED” with “escape valve”
• While this appears to be inefficient, it is useful for “internal control” purposes.
– Develop process for new parts and goods for U.S. market to be reviewed by appropriate personnel in United States before parts or goods ship to United States
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Part 3 – Customs Valuation
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Common Valuation Issues
• Items provided free of charge or at a reduced cost to a foreign supplier (“assists”)
• Payment of royalties and license fees to a foreign supplier
• Procurement or transfer of engineering• Post-importation price adjustments• Related-party transactions & unsupported
transfer pricing• Issues related to “no charge” shipments
and nominal value shipments
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Customs Valuation –5 Hierarchical Valuation Methods
• Transaction Value;• Transaction Value of Identical or Similar
Merchandise (based on the transaction value of previously imported merchandise);
• Deductive Value (selling price in the US less certain post-importation costs);
• Computed Value (foreign supplier cost information for materials, processing, profit, general expenses, etc.); and
• Fallback Method (methodology based on a modified version of one of the first four methods).
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Transaction Value
• Preferred basis of appraisement (vast majority of U.S. import transactions enter under transaction value)
• Price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions to the price
• “Price Actually Paid or Payable”– total payment (whether direct or indirect) for the
imported merchandise from the buyer to the seller– general presumption that all payments from the
buyer to the seller are dutiable– often the invoice price, but certain upward and
downward adjustments may be made
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Transaction Value (continued)
• Must have sale (no consignment shipments)• Related-party sales must be at arm’s length,
– all costs plus a profit, or – comparable to sales to unrelated parties in the
U.S.• Exclusions from transaction value, if separately
identified on the commercial invoice, include:– inland freight– international freight/insurance– technical assistance provided in the United States– duties and taxes
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Exclusions From Transaction Value
The following items will not be added to the price paid if they are separately invoiced or identified elsewhere:
1. Inland Freight —will not be included if the sale is ex-factory or if freight charge is shown separately by means of a through bill of lading
2. International Freight/Insurance — the costs/expenses incurred for transportation, insurance, and related services incident to the international shipment
3. Technical Assistance —charges for the construction, erection, maintenance, assembly or for technical assistance provided after importation of the product, if separately identified
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Statutory Additions to TransactionValue: The Checklist
• The following are added to value and declared to Customs when not included in invoice price for imported article:1. Commissions — selling commissions paid by
buyer2. Royalty or license fees paid by buyer as a
condition for the product to be exported to the U.S.
3. Assists4. Packing costs paid by buyer 5. Proceeds of any subsequent resale of the
goods transmitted to the seller
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Selling vs. Buying Commissions
• Selling commissions must be added to the price paid, but bona fide buying commissions are exempt
• Review of all transactions involving a middleman• Determine whether the middleman operates as an agent
(for buyer or seller) or operates as an independent entity
• Is the agent a buying agent?– Who is in control?– Who takes title? – Who bears risk of loss?– What does the agent do?– Relationships?– Written agreement?
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“Assists” Defined
Assists:
• Materials, components, parts and other items used in production
• Tools, dies, molds and similar items used to produce product
• Merchandise consumed in production of the imported merchandise
• Engineering, research, development, artwork, design work, plans and sketched produced other than in U.S.
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What Is the Value of an Assist?
1. Value of Assist generally is either:
– the cost of acquiring the assist, if acquired by the importer from an unrelated seller, plus freight costs, or
– the cost of the assist, if produced by the importer or a person related to the importer, plus freight costs
2. Used capital equipment is generally valued at its depreciated value at the time of transfer
3. Assist value must also include the cost of transporting the assist to the place of production
4. If the assist value is incorporated in the unit cost of the imported merchandise, no separate declaration is needed
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“Assist” Examples - Items used in the production of imported merchandise
• U.S. importer, or its related Japanese parent company, supplies, at a reduced cost, to its overseas related supplier a chemical catalyst used to make the finished good
• U.S. importer, or its related Japanese parent company, provides, free of charge, integrated circuits to a related party supplier in Singapore. The integrated circuits are to be used in the production of a completed transmitter
• U.S. importer, or its related Japanese parent company, supplies, free of charge, transistors to Japanese parent company to be used in the production of integrated circuits that are incorporated into flat panel displays
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Avoiding Potential “Assist” Problems
• “Assist” problems can often be avoided by ensuring payment by the overseas supplier for any materials, components, supplies, research, etc. that the U.S. importer provides– Review of transfer pricing practices– Incorporation of appropriate terms and conditions in
new supply contracts
• Planning for future shipments and proper valuation will avoid future problems, delays, and potential civil penalties
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Other Areas of Concern and Potential Valuation Problems
• Post-importation price adjustments
• Retroactive transfer price adjustments
• Currency Exchange Agreements
• Capital equipment imports which incorporate multiple shipments and progress payment terms and conditions
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Post-Importation / Retroactive Price Adjustments to Price Paid
• Post-importation price adjustments may occur for the following reasons:– Change in transfer price – Shortage/Overage– Incorrect product or SKU number– Contract adjustments upon exceeding (or
reducing) forecasted purchases– Other invoicing price or clerical errors
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Currency Exchange Agreements
• Currency risk sharing agreements affect “price paid or payable”– Payments usually have to be reported to
Customs
• If sale to U.S. in not in U.S. dollars, then for U.S. Customs purposes, the date of exportation of the goods is the date used for applying the rate of exchange - even if a different rate was used in payment for the goods
• Customs uses the rate of exchange determined and certified by the Federal Reserve Bank of New York
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Related Party Sales
• U.S. Customs reviews related party transaction to ensure that there is an arm’s length sale
• Related party sales may still be appraised using transaction value
• Customs Regulations provide that parties are “related” when they share:– Common officers or directors– Power to vote 5% or more of the
outstanding stock or shares– Family members
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Related Party Sales (continued)
• U.S. Customs may scrutinize sale to ensure that the relationship did not impact the price
• “Circumstances of Sale” Approach– Is price determined in a manner consistent
with normal industry pricing practice or the way seller deals with unrelated buyers?
– Is the transfer price adequate to recover all costs, plus a profit equivalent to the overseas seller’s overall profit?
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Transfer Pricing Issues
How to demonstrate that “relationship did notinfluence the price:”
• Can U.S. importer demonstrate that overseas selling entity covers all costs plus a reasonable profit?
• Transfer prices that are based on manufacturing costs only invite Customs scrutiny
• “All” usually means all!
– If overseas selling entity is selling at a loss, can U.S. importer justify why there is a loss?
• Is the Importer using the “test values” approach– Was comparison value from an actual importation and
accepted by Customs?
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Transfer Pricing
• Double checking you meet the “circumstances of the sale” test– How to demonstrate that “relationship did not influence the price”– Can you demonstrate that foreign selling entity covers all costs
plus a reasonable profit?• Watch for transfer prices that are based on manufacturing costs only• “All” usually means all!
– If foreign selling entity is selling at a loss, can you justify why there is a loss?
• Are you using the “test values” approach– Was comparison value from an actual importation and accepted
by CBP?
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Transfer Pricing
• IRS Accepted Transfer Price? Advance Pricing Agreement?– This is just one factor CBP will consider in determining
whether the relationship between the importer and the foreign seller influenced the price
– Not automatically accepted
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No Charge Shipments
• Returns/RMAs:– Have return/RMA department advise shipper of value
to use– Importer often will have to use “fall back” method of
appraisement• Use original sales price, if available
• Equipment transfers– If not sold, “fall back” method likely is basis of
appraisement• Book value• Objective source for fair market value
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No Charge Shipments
• Freehouse deliveries (“FHD”)– Importer often will have to use “fall back” method of
appraisement• Use original sales price, if available
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2
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1. Sale from Singapore Manufacturer to Tokyo buyer
2. Tokyo Buyer sells to Los Angeles Purchaser
3. Goods drop-shipped from Singapore Manufacturer to Buyer in Los Angeles
4. What value should be declared to U.S. Customs??
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“NISSHO IWAI” or “FIRST SALE”
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“First Sale” (Nissho Iwai “Multi-tiered” Transactions)
In Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) and Synergy Sport International, Ltd. v. United States, 17 CIT 18 (1993), the courts rejected U.S. Customs’ position that transaction value must be based upon the sale which most directly causes the exportation of the merchandise to the U.S., stating that “once it is determined that both the manufacturer's price and the middleman's price are statutorily viable transaction values, the rule is straightforward: the manufacturer's price, rather than the price from the middleman to the purchaser, is to be used as the basis for determining transaction value.”
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“First Sale” Issues
The tests that must be met (as set forth in the court cases) to establish a first sale transaction value are that the sale:– (1) was negotiated at arm’s length free from non-
market influences; and– (2) involves “goods clearly destined for export to
the United States”
U.S. Customs has developed several criteria to determine if there has been a bona-fide sale – and it is extremely difficult to support transaction value if the manufacturer and seller are related parties
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First Sale Issues (continued)
• Due Diligence Tools– Customs Informed Compliance
Publication “Bona Fide Sales and Sales for Exportation to the United States”
– Customs Valuation Encyclopedia– Customs Rulings
• Due Diligence Issues– How do you show “clearly destined for
the United States”?– How do you establish existence of
sale?
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Part 4 – Special Duty Programs & Country of Origin Marking
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Special Duty Programs
• “Golden rule” of CBP:– Every importation considered dutiable unless covered
by an exemption
• Special duty programs– Allow duties to be waived if certain conditions are met
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Special Duty Programs
• Examples of Special Duty Programs– North American Free Trade Agreement (“NAFTA”)– Generalized System of Preferences (“GSP”)– Caribbean Basin Initiative (“CBI”)– HTSUS Subheading 9801.00.10 (“US Goods
Returned”)– HTSUS Subheading 9802.00.80 (“US Goods
Assembled Abroad”)
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Special Duty Programs
• Key points to remember– Each program has its own “conditions” and
documentation requirements, i.e., each is unique– Never assume that because a product was
manufactured or purchased in a country affected by a special duty program that the good will be eligible for that treatment
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NAFTA
• Unique set of origin rules– No single rule of origin. Instead, each tariff code has
own origin rule– Some products have pure “tariff shift” rule; others have
“local content” requirement
• US importer needs to have NAFTA certificate of origin in his possession when claim is made– If claim is made without certificate, NAFTA claim is
invalid and cannot be fixed
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GSP
• “Unilateral” duty preference program, not a free trade agreement– Expires periodically and Congress must renew, which can create
periodic uncertainty
• 3 basic conditions for duty-free treatment– Product of “beneficiary” country– Direct shipment from beneficiary country to United States– At least 35% of U.S. customs value from (1) materials
originating in beneficiary country and/or (2) direct costs of processing incurred in beneficiary country.
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GSP
• Main issue with Japanese companies involves 35% requirement– More often than not, the product is shipped directly to
the United States, but is sold through Japan– For example, if local beneficiary country content is
$0.60 and price charged to Japan is $1.00, GSP % might be thought of as 60%. However, if Japan resells the product to its U.S. subsidiary for $2.00, then GSP % is now 30%, which is insufficient.
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Country of Origin Marking
• All “foreign” goods must be marked to indicate their origin
• Goods that are not marked properly cannot be imported– Goods that are not marked properly can lead to
substantial disruptions to supply chain
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Country of Origin Marking
• The Requirement to Mark– Every foreign article or its container must be marked with its country of
origin. That mark must be:• Legible (i.e., not hard to read),
• Indelible (i.e., must not fade or smear),
• Permanent (i.e., will not fall off unless deliberately removed),
• Conspicuous (i.e., easy to find), and
• In English.
The purpose of these requirements is to let the ultimate purchaser” in the United States know the foreign origin of the goods.
Markings may not be removed subsequent to importation.
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Country of Origin Marking
• Country of Origin
– Single country of manufacture, production, or growth.
– If more than one country look for substantial transformation.
– Material or goods purchased from Japanese supplier or affiliate do not automatically have U.S. origin.
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Country of Origin Marking
• Substantial transformation/non-NAFTA countries
– processing, manufacture that
– results in a new article
– and the new article has:
• different name
• different character
• different use
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Country of Origin Marking
• Repacking Imported Products– Imported in Bulk– Repackaged in United States– Must Mark New Containers
• Certification to Customs• Notification to Customer Who Will Repack
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Country of Origin Marking
• U.S. Address Label
– Country of Origin Marking Cannot Mislead or Confuse
– Reference to Other Localities Triggers Additional Requirements
– Country of Origin Must Appear
• In Close Proximity to
• Same Size Letters as
• Same Type Letters as
– Reference to Other Locality
– Address of U.S. Distributor or Manufacturer Triggers the Requirement
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Country of Origin Marking
• Penalties for Marking Violation– Demand for Redelivery– Liquidated Damages
• Up to domestic value of the articles
– Marking duties• 10% of the domestic value of the articles
– Criminal Penalties
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Country of Origin Marking
• Japanese exporters should be sure to communicate changes in sourcing to U.S. affiliates (e.g., Hong Kong sourcing changed to China has no duty consequences but does affect marking requirements)
• Japanese exporters should have a database with the origin(s) of each part shipped to the United States
• Export department should have written procedure for comparing physical markings to commercial invoices/paperwork to ensure consistency
• U.S. affiliate should review changes to packaging artwork
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Part 5 – U.S. Customs Enforcement
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U.S. Customs Enforcement Actions
• Customs inspections and examinations of entry documentation and/or merchandise
• Detention of merchandise• Seizure of merchandise• Civil Penalties
– Primary enforcement tool– Penalties apply regardless of
revenue impact– Penalties can be severe
• Liquidated Damages (Breach of Bond)• Criminal Penalties (Rare in commercial
cases unless egregious conduct)
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U.S. Customs Enforcement Actions (Continued)
• Customs is authorized to examine or inspect any imported shipment – for any reason
• Customs is also authorized to detain any imported shipment for any reason – release must occur within 30 days of notice of detention or entry may be protested (19 U.S.C. §1499)
• Seizure: Imported goods may be seized if imported contrary to law – the good themselves are considered the violator – not the importer (primary seizure authorities: 19 U.S.C. § 1595a(c) and 18 U.S.C. § 545
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Civil Penalties (Customs primary commercial enforcement tool): Who may be liable?
• The U.S. importer of record is primarily liable for the truth and accuracy of the information provided to Customs
• Anyone else who is involved in the import transaction may be “charged” with a violation including exporters, customs brokers, and consignees
• Exporters may be able to avoid civil penalties based on lack of U.S. jurisdiction overseas – but other consequences may occur (e.g., loss of business relationships with U.S. importer, damage to reputation, loss of export sales opportunities)
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Elements of a 19 U.S.C. § 1592 Violation – Customs Primary Commercial Enforcement Law
• Entry, attempted entry of imported goods• False statement, omission or act• Materiality
– i.e., potential impact on classification, value or admissibility– trade statistics are considered material
• Culpability – fraud, gross negligence, or negligence– Fraud = A knowing and willful material false statement, omission
or act – Gross negligence = Actual knowledge of, or a wanton disregard
for, the offender’s obligations under the statute– Negligence = A failure to exercise the degree of reasonable care
expected from someone in similar circumstances
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19 U.S.C. § 1592 Violation – Other Considerations
• Five-year statute of limitations (5 yrs. from date of entry in non-fraud cases – 5 yrs from date of discovery for fraud)
• Penalty assessments may be mitigated if certain factors are present (e.g., inexperience, prior good record, immediate payment of loss of duties, etc.)
• 19 U.S.C. § 1592 penalties are against the “person” – i.e., corporation, partnership or individual
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19 U.S.C. § 1592 Penalties: Recoveries
• Multi-million dollar penalties have been collected by U.S. Customs under 19 U.S.C. § 1592
• Frequently, large assessments are “settled” by U.S. Customs through negotiations with alleged violators
• Largest Civil Penalty settlement: $USD34 million against Daewoo (involved both U.S. importing subsidiary and Korean parent)
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19 U.S.C. § 1592: Responsible Parties
• Importer of Record: Principally Responsible - primary party in any enforcement action (e.g., penalties - liquidated damages)
• Importer of Record is party listed on line 11 of the U.S. Customs Entry Summary Form (“CBP 7501”)
• Consignee: Not liable for duties/liquidated damages - but can be audited, subject to compliance measurement, focused assessments and may be subject to penalties
• Customhouse broker: Agent of the U.S. importer – usually penalized for non-compliance under another law (19 U.S.C. §1641)
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19 U.S.C. § 1592: Responsible Parties – Impact on Exporters
• Exporter: U.S. Customs has charged exporters with violations of 19 U.S.C. § 1592 under rationale that the exporter “caused” the non-compliant importation or “aided and abetted” in the importation
• Usually, U.S. Customs cannot obtain personal jurisdiction over the exporter – but may be able to obtain a default judgment in serious cases
• 19 U.S.C. 1592a provides for penalties against textile and wearing apparel exporters who violate U.S. customs laws and the law provides for annual publication of a list of exporters found to be in violation
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U.S. Customs Entry Records - Importer/Exporter Responsibilities
• Importer of record responsible for truth and accuracy of information furnished to Customs - including CBP 750, invoices, packing lists, manifests, etc.
• Importer of record responsible for correct merchandise description, value, quantity, and country of origin information
• Importer of record responsible for furnishing any additional documentation for the merchandise at issue
• Exporter should provide complete and accurate invoice descriptions - failure to do so may result in release delays, greater Customs scrutiny and possible supplier liability to Customs for penalties
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1. Tariff classification
2. Valuation
3. Quantity
4. Admissibility (e.g., country of origin)
5. Special Preference Programs (e.g., NAFTA)
Key Commercial Compliance Issues
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Correct Invoice Description Is Essential
• Invoices:– Should describe product as known in the industry
in the country of export– 19 USC §1481(a)(3) requires a complete and
accurate invoice description– Incomplete and/or false invoice descriptions can
lead to civil penalties – whether or not the correct tariff classification is used!
– Duty free goods are not exempt from complete invoice description requirement
– 24 hour rule and security considerations underscore importance of accurate merchandise description
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Valuation Compliance• Customs examines Entry Documentation (i.e.,
invoice, entry, entry summary) to ensure that proper value declared to Customs - Common types of valuation non-compliance:
• Undervaluation (includes failure to declare assists, indirect payments, royalties, commissions, rebates etc.,) or overvaluation
• Unsupported “transfer prices” or “first sale” valuations
• Quantity errors may result in undervaluation• Note that value elements are required to be
declared to Customs on entry documents even in cases where the merchandise is duty free - failure to do so may result in imposition of non-revenue loss 19 U.S.C. §1592 penalties
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Country of Origin Marking Penalties
• Penalties for Marking Violation– Demand for Redelivery (made
upon importer)– Liquidated Damages - up to bond
amount– Marking duties - 10% ad valorem– Seizure of improperly marked
merchandise (19 USC 1595a(c) – Criminal Penalties for Intentional
Removal of marking
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U.S. Customs 19 U.S.C. § 1592 Prior Disclosure Provision
• Elective procedure that permits any party to disclose a violation of 19 U.S.C. § 1592 to obtain reduced penalties
• A valid disclosure involves full disclosure of the circumstances of a violation before or without knowledge of the commencement of a formal U.S. Customs investigation of the disclosed violation
• The disclosing party defines the scope and issues set forth in the disclosure
• Disclosures should NOT be made without first consulting in-house counsel or outside counsel
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Without Prior Disclosure With Prior Disclosure
Fraud:• Up to 100% of the domestic value
Fraud:Penalties for Revenue Loss Violations• 1 times the loss of duties
Gross Negligence:Penalties for Revenue Loss Violations • The lesser of 100% of the domestic value or 4 times the loss of duties
Fraud:Penalties for Non-Revenue Loss Violations • 10% of the dutiable value
Gross Negligence:Penalties for Non-Revenue Loss Violations • 40% of the dutiable value
Gross Negligence:Penalties for Revenue Loss Violations
• Interest on any loss of duties
Negligent Violations:Penalties for Revenue Loss Violations • The lesser of 100% of the domestic value or 2 times the loss of duties
Gross Negligence Non-Revenue Loss Penalties for Non-Revenue Loss Violations • No penalties
Negligent Violations:Penalties for Non-Revenue Loss Violations • 20% of the dutiable value
Negligent Violations:Penalties for Revenue Loss Violations
• Interest on any loss of dutiesNegligent Violations Penalties for Non-Penalties for Non-Revenue Loss Violations • No penalties
Section 1592 Penalty Chart
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Reasonable Care
• If a party acts with “Reasonable Care,” the party may be able to insulate themselves against 19 U.S.C. § 1592 penalties (Reasonable Care = No culpability – thus no violation of 19 U.S.C. § 1592)
• What is “reasonable care?” No clearly defined definition - depends on facts and circumstances of each case – U.S. Customs Reasonable Care checklist provides guidance but is not binding on Customs or U.S. importer
• In U.S. v. Golden Ship Trading Company, the U.S. Court of International Trade (CIT) indicated that a failure to attempt to verify the exporter's information constituted a lack of reasonable care
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“Reasonable Care” - Reliance on an “Expert”• A party may be able to avoid 19 USC § 1592 penalties if:
– Party requests advice from an expert prior to import,– Party receives advice from an expert prior to import,
and– Party relies on advice in filing entry for the subject
merchandise• “Experts” include attorneys, accountants, brokers and
consultants (with expertise in the area under consideration)
• Attorneys: Availability of attorney-client privilege (not extended to other “experts”)
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Other U.S. Customs Sanctions
• Detentions/Seizures - 19 USC § 1595a(c)• Request for Redelivery/Liquidated Damages• Entry Rejections • Greater Scrutiny - Intensive and/or more
frequent examinations• Customs Focused Assessment (i.e., audit)• Denial of Immediate Delivery Privileges • Requiring an increase in bond amounts• Notices of Action - Rate/Value Advances
